American Power Act Is a “Model” for Economic Growth

Best Analyses Available Show Climate Legislation Is a Good Investment

By Richard W. Caperton
Posted on June 9, 2010, 9:00 am

For the last five weeks the Environmental Protection Agency has been analyzing economic impacts of the American Power Act, climate legislation written by Sens. John Kerry (D-MA) and Joe Lieberman (I-CT). EPA’s analysis will influence whether or not other senators support the legislation and ultimately whether or not Congress takes action to move the United States toward a clean energy economy. With stakes that high it’s vitally important that legislators understand the bill’s complete economic effects, including how their constituents will benefit. For instance, their constituents could see economic savings from energy conservation measures and avoiding the adverse impacts from climate change inaction. But there are other benefits, too: Recent studies of climate legislation show the Kerry-Lieberman bill will create between 1 million and 2 million new jobs by 2020 and dramatically grow the U.S. economy.

The EPA is one of many governmental and nongovernmental entities that will analyze the Kerry-Lieberman legislation. All of these analyses will use complex modeling of the entire U.S. economy to project how the economy would respond to policies that are included in the legislation.

Every economic model works differently, and each model is better at some things than others. It is not an exact science. Accurately predicting what energy and the economy will do in the future requires accurately predicting factors that fluctuate greatly, such as natural gas prices. This means that modeling isn’t a picture of what will happen but more a picture of what is likely to happen.

This type of modeling is something only an economist could love: dynamic interactions across economic sectors, elasticity equations, input modules, and various other tools—all powered by lots of calculus. Despite all of the models’ technical power, though, the old adage of “garbage in, garbage out” still stands.

The quality of energy legislation modeling runs the gamut from “excellent” to “okay” to “incomplete” to “absurdly bad.” A tremendous number of variables exist in any model, starting with how the model’s internal workings (the “black box” that actually performs many of the calculations) reflect assumptions about the economy and going on to include inputs that reflect predictions of the future and how certain policies’ mechanics get used in the model.

The choices a modeler such as the EPA makes in analyzing climate legislation will ultimately determine the quality of the analysis. The modeler should make these choices for the analysis to be truly excellent:

Fully include energy efficiency’s effects.Climate legislation will help consumers save money on energy. And when consumers spend less money on energy, they spend more money in other parts of the economy—resulting in economic growth.

Don’t put arbitrary limits on the availability of technologies or carbon offsets.These arbitrary limits typically drive up the cost of complying with emission limits and either reflect biases against technologies (sometimes reflected in restricting nuclear power’s availability) or biases against the legislation (such as limiting the availability of cost-containment mechanisms like offsets, which artificially inflates the legislation’s price tag).

Acknowledge that consumers are the ones who primarily benefit whatever the initial allocation of pollution allowances is.Consumers benefit, for example, when their local utility gets free allowances to help it comply with new laws. Ignoring this artificially drives up the cost to consumers.

Consider all complementary policies. Simply modeling a cap on carbon ignores all the other policies that can help the economy reach that cap with minimal economic disruptions. The Kerry-Lieberman bill, for example, provides low-interest financing for low-carbon technologies that will help utilities meet a cap.

Make the “black box” as transparent as possible. No layperson can fully understand all these models’ workings, but outside expert reviewers need to know how the model works to evaluate the analysis. Modeling should be done using publicly available information and a widely available modeling tool such as REMI or NEMS.

Clearly state conclusions in a way that does not distort the public’s understanding of the analysis.The baseline for comparison is especially important. A good analysis will tell you if the comparison is to the world today or the world as it’s expected to be in the future without legislation. Consider this scenario: Someone gives you a coin to flip and tells you that you will get paid $99 if it lands on tails or $100 if it lands on heads. This is your lucky day, since either way you make at least $99! Modeling of this scenario should show that you end up $99 richer if you land on heads, but some analyses present this data as you being $1 poorer than if you had landed on heads. This overstates the benefit of landing on heads. Some analyses of climate legislation modeling say that passing a climate bill will make the United States 1 percent poorer when the reality is that we will be 99 percent richer than we are today. Understanding the baseline is therefore key to our understanding of this scenario.

The EPA analysis will likely be very good, but it may not necessarily capture all of the good modeling qualities described above. Fortunately, a growing body of excellent models show tremendous economic benefits from climate legislation.

The Peterson analysis’s one shortcoming is that it likely undercounts energy efficiency’s effects, since it’s not clear that they include all the efficiency potential that would result from the Kerry-Lieberman bill.

Still, Peterson finds the bill will lead to massive job creation and minimal additional energy spending for consumers. They conclude, “On the whole, real household consumption is slightly higher under the American Power Act than under business as usual during the period evaluated ($37 per year more on average between 2011 and 2030).”

These results are also in line with findings from other recent analyses. The table below shows some results from recent modeling of transitioning to a clean energy economy.

Senators should use the best modeling possible to decide how to vote on the Kerry-Lieberman bill. That modeling exists, and the results are clear: Moving to a clean energy economy will create jobs and revitalize the American economy.